Sunday, June 30, 2013

On this day in 1864, President Lincoln signed a bill that preserved Yosemite Valley in California for public use, a precursor to the national park system. In the second half of the 19th century, naturalists like John Muir fought for greater conservation, in part because of Niagra Falls. In 1864, Niagra Falls was so dominated by commercialism and industrialization that sightseers had to pay even for a glimpse.

In 1906, in a letter to President Roosevelt, Muir wrote his concern for the proposal to dam the Hetch-Hetchy valley in Yosemite. Muir discredited the argument made by banker and senator James D. Phelan that converting Hetch-Hetchy into a reservoir will simply mean transforming it into a lake instead of a meadow.

"But Hetch-Hetchy is not a meadow: it is a Yosemite Valley. These sacred mountain temples are the holiest ground that the heart of man has consecrated and it behooves us all faithfully to do our part in seeing that our wild mountain parks are passed unspoiled to those who comes after us, for they are the natural properties in which every man has a right and an interest. I pray therefore that the people of California be granted time to be heard before this reservoir question is decided...What the public opinion of the world would be may be guessed by the case of the Niagra Falls."

Saturday, June 29, 2013

On this day in 1776 Lieutenant José Joaquin Moraga and Father Francisco Palóu founded the Mission of San Francisco de Asis (aka "Mission Dolores") near 16th and Dolores in today's San Francisco Mision district. The Mission of San Francisco de Asis became the cultural and religious center of the Spanish colony. When it became part of the United States in 1848, the city took its name from this Mission settlement (preferring it over Yerba Buena).

On this day in 2013, thousands (including me) will be celebrating here, a momentous advancement in civil rights.

Given all the activity this day holds for San Francisco, it's a good time to be reminded of the legacy and wisdom of Saint Francis himself. Rule 11 from his Rules of the Friars of Minor is excerpted below.11-That the Brothers ought not to speak or detract, but ought to love one another.Let [the brothers] love one another, as the Lord says: "This is My commandment, that you love one another, as I have loved you." And let them show their love by the works they do for each other, according as the Apostle says: "let us not love in word or in tongue, but in deed and in truth." Let them "speak evil of no man," nor murmur, nor detract others, for it is written: "Whisperers and detractors are hateful to God." And let them be "gentle, showing all mildness toward all men." Let them not judge and not condemn, and, as the Lord says, let them not pay attention to the least sins of others, but rather let them recount their own in the bitterness of their soul. And let them "strive to enter by the narrow gate," for the Lord says: "How narrow is the gate, and strait is the way that leadeth to life, and few there are that find it!"

Thursday, June 27, 2013

On this day in 1989, the FDIC sold twenty failed subsidiary banks of MCorp of Dallas, TX to Banc One of Columbus, OH. MCorp was a holding company for 25 Texas banks and one trust company. With $18 billion in assets, it was the second largest banking entity in Texas (FirstRepublic was the largest).

A year before the FDIC's arrival, MCorp sold off part of its businesses to try to boost profits. First, it sold MTech, its tech subsidiary, to Electronic Data Systems (Ross Perot's company) for $281 million. Next it sold MNet, its consumer lending operation, for $119 million. These two sales enabled the holding company to accumulate $400 million in cash reserves.

As weaknesses in MCorp's subsidiary banks became apparent, the Federal Reserve ordered MCorp to release its $400 million in cash reserves to shore-up its struggling banks. The board refused, claiming funding a failing institution was not in the best interest of the holding company's shareholders.

Despite a slew of lawsuits, MCorp's board won and got to keep both the cash reserves as well as the five remaining performing banks. The FDIC, on the other hand, incurred losses of $2 billion cleaning up the failed entities.

The FDIC made sure this never happened again. It worked with Congress to approve a cross guarantee provision that protected the insurance fund from future holding company conflicts of interests. While some bankers were not happy, in a phone call to FDIC Chairman Lewis William Seidman, Ross Perot thanked "the FDIC for being willing to step up and do something when disaster was at hand."

On this day in 1893, the San Francisco Call reports the Government of India ceased its free silver monetary policy in favor of adopting the gold standard. At the time, India was the largest purchaser of silver in the world. As a result of the announcement, silver prices on Wall Street crashed, exacerbating a financial crisis which would become one of the worst depressions in US history.

After a failed experiment to eliminate silver as a currency in 1873, congress was operating under two Acts--The Bland-Allison Act (1878) and Sherman Silver Purchase Act (1890)--that required the treasury to purchase up to $4,000,000 in silver per month.

Those in favor of this policy were called "Silverites," and they argued that an inflationary monetary policy--with unlimited silver coins in circulation--helped famers payoff debt, Western miners increase revenue, and, by providing more currency, spread prosperity.

Shouts from bankers to repeal the Sherman Silver Purchase Act and stabilize markets were loud on this day in 1893. Democratic President Grover Cleveland eventually did in August.

This did not deter the Silverites, who continued to call for a free silver monetary policy, making the issue less about currency and more about a fight between Eastern bankers and Western miners, urban merchants and rural farmers, capital and labor.

"The man who is employed for wages is as much a businessman as his employer. The attorney in a country town is as much a businessman as the corporation counsel in a great metropolis. The merchant at the crossroads store is as much a businessman as the merchant of New York. The farmer who goes forth in the morning and toils all day, begins in the spring and toils all summer, and by the application of brain and muscle to the natural resources of this country creates wealth, is as much a businessman as the man who goes upon the Board of Trade and bets upon the price of grain. The miners who go 1,000 feet into the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be poured in the channels of trade are as much businessmen as the few financial magnates who in a backroom corner the money of the world...If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

Image is from the Library of Congress with the following description: Print shows a highwayman identified as a "Silverite", holding two handguns labeled "Free Coinage" and "McKinleyism", and with papers extending from a pocket labeled "Paternalism" and "Wild Cat Schemes"; he is holding-up a stagecoach labeled "National Prosperity" with passengers labeled "Lawmaker, Banker, Farmer, Workingman, Manufacturer, [and] Merchant". The "Lawmaker" and the "Merchant" have both hands raised, while the "Banker, Farmer, Workingman, [and] Manufacturer" are reaching into their pockets.Further ReadingThe “Wizard of Oz” as a Monetary Allegory,’ from the Journal of Political Economy (1990)

Tuesday, June 25, 2013

On June 26 in 1934, President Roosevelt signed the Federal Credit Union Act. The country was still reeling from the banking crises of 1933. Many people's life savings were destroyed when banks failed, and the Federal Credit Union Act's was designed "to make more available to people of small means credit for provident purposes through a national system of cooperative credit, thereby helping to stabilize the credit structure of the united States."

Unlike banks, credit unions are classified as non-profits exempt from taxes. As a cooperative, their customers--called "members"--are also their owners. Monthly statements from credit unions show dividend payments rather than interest.

Starting in 1985, the National Credit Union Administration (a regulatory agency) instituted a policy that allowed credit unions to expand their membership requirements, eliminating one of the primary differences between banks and credit unions.

In 1998, banks complained all the way to the Supreme Court that "diversified" membership violated the Federal Credit Union Act, and won. Their victory was short-lived. Within a year, Congress had written a new law that allowed the expanded membership to continue.

The tension between banks and credit unions continues today. Credit unions argue by serving "people of small means" they fill a critical gap deserving of the tax subsidy. Bankers like David L. Tapp (former President of Overton Bancshares) contend credit unions "should either be allowed to have a common bond or be forced to pay taxes...If credit unions paid taxes and had the same regulatory burden banks do, I'd compete with them every day of the week.''

On this day in 1906, the Pittsburg millionaire, original "playboy" and sociopath Harry K. Thaw put three bullets into his nemesis Stanford White in front of 1,000 theater-goers atop Madison Square Garden in New York City. Stanford White was a prominent architect who designed many New York landmarks, including the Bowery Savings Bank. Stanford was also a former lover of Thaw's wife, the actress and model Evelyn Nesbit.

The Thaw family was famous for buying people's silence when Harry misbehaved. Even though Harry confessed to the crime immediately after the shooting, his ability to pay-off witnesses (including his wife) resulted in a hung jury. His trial was called the "trial of the century."

The story has inspired many fictional accounts, including E.L. Doctorow's novel Ragtime. In the musical Ragtime (based on the book), the character Evelyn Nesbit sings about her experience.

Monday, June 24, 2013

On this day in 1922, Mid-summer Day, the German minister of foreign affairs Walther Rathenau was shot dead by masked assassins near his home in Berlin. New York's Evening World reported "Walther Rathenau was the best hope for the reorganization of the German Empire into a strong republic."

Devastated by Ranthenau's murder, support for the Weimar Republic initially increased, and June 24 became a day of public commemoration. But the death of a prominent Jewish banker, businessman and one of the founders of the German Democratic Party, turned pessimism about Germany's democratic future into panic. The tide of inflation--despite attempts from the US to help--flowed on. From June to December 1922, the exchange value of the mark changed from 1/3 to 1/100 of an American cent, and domestic prices multiplied more than 20 times.

Rathenau's ability to use his business skills to solve political problems was widely appreciated. The Ogden Evening Standard reported

"Dr. Rathenau was styled the 'wizard of the German empire' because, by his high powers of organisation, and business efficiency he devised expedients which kept 'the people eating the armies shooting' when the blockade had shut off the importation of raw materials during the war. After the war as minister of reconstruction, his meetings with the French minister Louis Loucheur brought about with business-like directness adjustments and accommodations which had been the dispair of diplomats.He was of Jewish birth and was described as a man with great force and energy, business acumen, vision and initiative."

When the Nazis took over in 1933 reverence for Ranthenau was eradicated. Streets and schools were renamed, statues dismantled and the Walther-Rathenau-Museum, in his former mansion, destroyed.

The post-World War II economy had experienced a huge labor upsurge, and with that an increase in labor union participation. Additionally, unions had taken a no-strike pledge during the war, and their built-up resentments exploded at war's end.

In general, President Truman was not happy with the havoc the numerous strikes wreaked on the post-war economy. In the United Mine Workers strike in the Spring of 1946, he threatened to use the army as strikebreakers and take government control of railroads. An agreement was made (on the President's terms) before he had to make good on his threats.

Nonetheless, the Democrat believed firmly in the rights of labor unions, in part because they kept government out of enterprise. In his veto (excerpted below) he argued that by restricting unions, the bill imposed too much government into private economic affairs, and disrupted the balance of power between labor and management.

"Our basic national policy has always been to establish by law standards of fair dealing and then to leave the working of the economic system to the free choice of individuals. Under that policy of economic freedom we have built our nation's productive strength. Our people have deep faith in industrial self-government with freedom of contract and free collective bargaining...This [bill] is a long step toward the settlement of economic issues by government dictation. It is an indication that industrial relations are to be determined in the halls of Congress, and that political power is to supplant economic power as the critical factor in labor relations."

Mr. Daley's address that night was "The Gayety of Nations." Unfortunately, a copy of that poem could not be found. Instead Banker's Notes will serenade you with another T.A. Daley classic "Mia Carlotta." A reminder that neither money nor mustaches buys love.

Friday, June 21, 2013

On this day in 1893, philanthropist, Governor of California, US Senator, Wells Fargo board member (for 23 years), and railroad tycoon Leland Stanford passed away in his home in Palo Alto.

Stanford first came to California during the Gold Rush in 1852, with his wife Jane Elizabeth Lathrop. Childless for the first eighteen years of their marriage, they had their first and only son Leland Stanford Jr. when Jane was almost forty. At the tender age of fifteen, Leland Jr. died of typhoid while travelling in Europe. The parents were heartbroken, and, according to Stanford history, resolved that "the children of California shall be our children."

In Stanford's obituary, the San Francisco Call wrote about the university he and his wife opened just two years prior, and endowed with $20 million."Without doubt the Leland Stanford Jr. University will be the most enduring monument of Governor Stanford's merits as a man and a philanthropist. Even at this early day no person visits California without looking in at the University at Palo Alto. In the years to come when the magnificent endowment has come to full fruition and the green swards of Palo Alto are covered with the contemplated structures for the home of learning, there is no saying that the University will not be the chief attraction among California's many points of interest."

Such relationships were flagged as troublesome as far back as 2004. An FDIC examination warned that the bank's "over-line loans" posed a credit risk (over-line loans are loans made by bank affiliates because the borrower does not meet the credit standards and/or goes above the legal lending limit of the bank). The FDIC concluded that because of over-line lending, the parent company was not a source a strength to the bank. Examiners rated the bank a "3" for management controls (on a scale from 1 to 5, "1" = safe and sound, "5" = imminent failure).

Regulators raised the management controls rating to a "2" in their 2006 examination in part because management confirmed that the bank had stopped making over-line loans, and limited loans to individual borrowers to 35% of capital.

By March 2009, however, 12 borrowers represented 243% of capital (54% of the non-performing loans), and over-line lending appeared to be alive and well. The memo cites an example of a loan approved in 2007 for a condominium project that exceeded the bank's legal lending limit. To cover funds, Washington First Capital (the bank's venture capital affiliate) advanced the amount required.

Unfortunately, WFC ran out of cash before the project was completed. The condo project's failure alone was $13 million. By May 2010, examiners downgrade the management control rating a "5," and the bank failed in June 2010. Assets of the bank were acquired by Pasadena-based East West Bank.

The OIG memo concludes:

"The sharp decline in the bank's ratings that paralleled the deterioration in the institution's financial condition underscores the risks associated with the affiliate relationships in the years preceding the economic downturn. At a minimum, consistent with forward-looking supervision, greater emphasis in the examination reports on those risks and the adequacy of mitigating controls may have been warranted."

Tuesday, June 18, 2013

On this day in 1865, slaves in Texas were informed, two years after the Emancipation Proclamation, that they were freed.

The word "Juneteenth" is a promanteau, or combination of words and in this case, events. On June 18th, the Union took control of Galveston, Texas from the Confederates. On June 19th, General Gordon Granger read aloud from the steps of the Ashton Villa declaring the slaves freed by the Emancipation Proclamation.

Today Junteenth is celebrated nationwide. Festivities range from rodeos to barbeques to baseball, imbibed with a spirit of history, family and prayer.

"It is therefore with sorrowing hearts that we are compelled thus to acquaint your Excellency with our sad disappointments, for our present condition, is in many respects, worse than when we were slaves and living under slave law. Under the old system we had the protection of our masters who were financially interested in our welfare. That protections is now withdrawn, and our old masters have become our enemies, who seek not only to oppress our people, but thwart the designs of the Federal government and of Northern benevolent associations on our behalf. We cannot appeal to the laws of Virginia for protection, for the old negro laws still prevail; and besides the oath of a colored man against a white man will not be received in our State courts, so that we have no where to go to for protection and justice but to that power which made us free...However sad our hearts be over the present state of affairs, we have lost none of our faith in, our love for the Union, or for yourself as Chief Magistrate, and therefore as oppressed, obedient, and loving children, we ask your protection...And in conclusion, let us respectfully remind your excellency of the sublime motto, once inscribed over the portals of an Egyptian temple 'Know all ye who exercise power that God hates injustice.'2013 Juneteenth CelebrationsGalveston, TXBerkeley, CAOakland, CAWinston Salem, NCThe Story of Ralph Ellison's unfinished novel Juneteenth

On this day in 1913 the financial advice columnist Sylvia Porter was born. From 1936-1978 Ms. Porter wrote about personal finance for the New York Post. She was loved for her ability to put complex financial issues into language that non-financial people could understand. At the height of her career, her readership numbered 40 million.

When Porter's family lost everything in the stock market crash of 1929, she switched her major from English to economics and became an expert on government bonds. Writing under the moniker "S.F. Porter," her first column was in American Banker. Her readership grew quickly, and within three years she was the finance editor at the New York Post.

In an interview in People Magazine in 1979, as another economic crisis was unfolding, she reiterated her life-long view that ignorance is the cause of most financial misfortune.

"We are a nation of economic illiterates. I have been
arguing for years that we must make pure economics and consumer
economics required courses in high school, if not elementary school. The
people who teach economics in college are so ignorant themselves it's
ridiculous! A group of college-educated bankers was given a test, and
the majority missed questions on the balance of payments problem, the
functions of the Federal Reserve and the origin of commercial bank
deposits. Enough!"

Monday, June 17, 2013

On this day in 1930, President Herbert Hoover signed into law the Smoot-Hawley Tariff Act, and raised duties on imported goods to record levels. Over a thousand economists (almost the entire profession at the time) had pleaded with Hoover to veto the bill. But ultimately, Hoover caved to pressure within his party. The Republicans argued that by keeping foreign goods out, tariffs would stimulate the US economy.

In May 1930, the New York Times printed the economists' letter to President Hoover, in which they warned of the domestic turmoil tariffs will cause as well as its international implications.

"Finally we would urge our government to consider the
bitterness which a policy of higher tariffs would inevitably inject into our
international relations. The United States was ably represented at the world
economic conference which was held under the auspices of the League of Nations
in 1927. This conference adopted a resolution announcing that the time has come
to put an end to the increase in tariffs and to move in the opposite direction.

The higher duties proposed in our pending legislation
violate the spirit of this agreement and plainly invite other nations to
compete with us in raising further barriers to trade. A tariff war does not
furnish good soil for growth of world peace.”

Saturday, June 15, 2013

On this day in 1752, Benjamin Franklin is traditionally thought to have proved that lightening is electricity while flying a kite in a thunderstorm (though the exact date cannot be confirmed).

Franklin was not only a scientist, philosopher, musician, statesmen, and founder of the University of Pennsylvania, he was also an early proponent of fiat currency (paper money that is not backed by silver or gold).

Franklin understood that a reliance on silver and gold left the colonies dependent on the Europeans, who had greater access to the precious metals. A lack of ready supply also left the provinces vulnerable to currency shortages, which restricted the domestic economy.

Pennsylvania first issued paper money in 1723 (the same year the 17 year-old Franklin moved to Philadelphia). It was backed by land assets and future taxes owed rather than gold and silver. Franklin observed that with paper currency, domestic trade increased, along with employment, construction, and population.

Franklin also wrote on the subject of building personal wealth. In his classic Poor Richard's Almanac, he advised not to waste time, to avoid debt, and to watch the little things."What maintains one vice would bring up two children. You may think, perhaps, that a little tea, or a little punch now and then, diet a little more costly, clothes a little finer, and a little entertainment, can be no great matter; but remember, Many a little makes a mickle. Beware of little expenses; A small leak will sink a great ship."

Friday, June 14, 2013

Today, June 14 is celebrated nationwide as Flag Day. On this day in 1937 Pennsylvania became the first (and only) state to recognize Flag Day as a State holiday.

On this day in 1771, the new US Congress "Resolved: That the flag of the thirteen United States be thirteen stripes, alternate red and white; that the union be thirteen stars, white in a blue field, representing a new constellation."

On this day in 1923, the US Army and Navy created a National Flag Code, that describes the handling and displaying of the Stars and Stripes. It wasn't until 1942 that the US Congress declared the Flag Code law (though no penalties are enforced if the law is broken).

In addition to providing rules for government agencies, the Code also provides customs for display of the flag by civilians, including:

(i) The flag should never be used for advertising purposes in any manner whatsoever. It should not be embroidered on such articles as cushions or handkerchiefs and the like, printed or otherwise impressed on paper napkins or boxes or anything that is designed for temporary use and discard. Advertising signs should not be fastened to a staff or halyard from which the flag is flown.

Image is from the Smithsonian website. Some of the earliest court battles over flag desecration focused on tobacco and alcohol advertisements, which were criticized for linking the flag to immoral habits. (A "cheroot" is a cigar.)

Thursday, June 13, 2013

On this day in 1950, Pulitzer Prize-winning poet Wallace Stevens wrote to his editor Barbara Church.

Stevens was a unique poet, though he refused to concede that there was anything unusual about his dual role as an insurance executive. At the time of his death in 1955, he was not only one of the leading poets of the English-speaking world, but also the foremost American authority on surety bonds.

Rather than resent having a job that took him away from his poetry, he seemed to cherish it. Even after winning the Pulitzer Prize, he turned down the Charles Eliot Norton professorship of poetry at Harvard in order to remain the insurance company’s vice-president.

In a letter written on this day five years before his death, he talked about poetry as protection.

"I have the same sensation that everyone has as the circle begins to close. I must drink more champagne. In a moment I must write to Miss Vidal to look for a copy of [Leon-Paul] Fargue's Poemes 1911-12 for me. It seems that this volume contains the best of Fargue, and, if so, I shall like to carry it about with me a bit. I like the idea of a book as a talisman to take the place of the rabbit's foot: something that guards one in the midst of everything profane."

An American banker, art collector, emissary, and philanthropist, David Rockefeller led a distinguished career as Chairman and CEO of Chase Manhattan Bank (now JPMorgan Chase). Under his stewardship, he helped the bank become a central pillar in the world's financial system, including setting up the first branch of an American bank in One Karl Marx Square in 1973.

On working with the anti-capitalist nation, Mr. Rockefeller said "I have found nothing but cordiality with all the officials with whom I've met. I cannot help concluding they have not taken their own propaganda too seriously."

Monday, June 10, 2013

On this day in 1962, Frank Lee Morris and brothers John and Clarence Anglin successfully escaped from the federal penitentiary on Alcatraz island in San Francisco.

Mr. Morris had a long rap sheet and history of successful prison escapes. John and Clarence Anglin were serving time for robbing a bank in Columbia, Alabama. They were sent to Alcatraz after escaping from the Florida State Penitentiary.

The escape plan was extremely complex. According to the New York Times, they worked in a secret workshop atop their cellblock.

"There, they created an inflatable raft of rubber raincoats held together with thread and contact cement, plywood paddles, plastic bags crudely turned into floating devices and dummy heads of plaster and toilet paper, made realistic with paint from prison art kits and hair clippings from the barbershop.They stole a small accordion-like concertina from another inmate to serve as a bellows to inflate the raft. Finally, they climbed through the utility corridor and up a shaft of pipes and ducts to the roof, where they cut away most of the rivets holding a large ventilating fan and grille in place. Dabs of soap substituted for rivet heads — a little artistic touch, should anyone notice.
On the night of the escape, only one thing went wrong: Allen West, a fourth inmate who had planned to join them, had trouble opening the vent at the back of his cell — he had used cement to shore up crumbling concrete and it had hardened — and was left behind. He later gave investigators many details of the escape.The others put their dummies to bed, retrieved the raft and other materials from atop the cellblock and climbed the ducts to the roof, where the fan-grille escape hatch had been prepared. In clear view of a gun tower, they stole across the roof, hauling their materials with them, then descended a 50-foot wall by sliding down a kitchen vent pipe to the ground. The wall was illuminated by a searchlight, but no one saw them.
They climbed two 12-foot, barbed-wire perimeter fences and went to the northeast shoreline — a blind spot out of range of the searchlights and gun towers — where they inflated their raft with the concertina. It was after 10 o’clock, investigators later estimated, when they shoved off. A dense fog cloaked the bay that night, and they disappeared into it."

On this day in 1893, the New York Tribune reports that twenty-two lives were lost and dozens injured when the Ford Theater collapsed in Washington, D.C. The building had been converted into a three-story office building in 1865, after Lincoln was assassinated. Causes of the collapse were later determined to be negligence by the building contractor, who was excavating under pillars without sufficient support. The Ford Theater was then closed as an office structure.

In 1931, the building was transferred to the National Park Service, and reopened on this day, June 10, 1933 as the "Lincoln Museum."

Citizens were outraged by the building's collapse in 1893. Especially since it was known to be defective. The symbolism of the tragedy was not lost."Another tragedy--less national in character than the first but involving many more lives and causing much more human suffering--has stained the walls of the old Ford Theater where Abraham Lincoln was assassinated by J. Wilkes Booth in 1865...The house where Lincoln died, on the other side of the street where Lincoln was shot, which is still sentimentally kept in tact as it was that fatal night, looked down to-day upon a scene of agony, excitement and grief which even the great crime of 1865 cannot parallel.And the horrors of the scene were by no means lessened by the knowledge that a blunder, surely in this case 'worse than a crime' had caused the deaths."

Image is from the Library of Congress with the title: Washington, D.C. Ford's Theater with guards posted at entrance and crepe draped from windows, to signify mourning.Further ReadingHistory of the Ford Theater

Sunday, June 9, 2013

On this day in 1913, the Washington Herald reported that the Illinois legislature was debating the subject of wages and vice. The country was reeling from a "moral panic" that began in 1909, and that ultimately resulted in the passing of the Mann Act in 1910.

At issue in 1913 was whether persistent low wages caused men and women to have immoral lifestyles, and whether low wages themselves were immoral. The Illinois senate had proposed a minimum wage law as a solution.

At the hearing, President of the University of Chicago Harry Pratt Judson, refused to connect low wages with immorality. "It is not always due to inadequate wages, but inadequate efficiency," he said. "The man cannot earn more because he is not worth more."

William T. Abbot, Vice President of the Central Trust Company of Illinois (today Bank & Trust Company), was also against a minimum wage law for women. He said that in his bank, many women were paid more than men employed at the same work.

"In any work that requires infinite attention to detail," he said, "women employees are superior to men."

Saturday, June 8, 2013

On this day in 1784 the Bank of New York was founded by Alexander Hamilton. The Bank of New York would become one of the first five securities traded under the Buttonwood tree when the NYSE was formed eight years later. Today, the Bank of New York exists as as The Bank of New York Mellon or BNY Mellon, the oldest bank in the US.

In a letter to Continental Congress president John Jay, written in 1779, Hamilton proposed recruiting African-Americans for the Continental Army, noting "I have not the least doubt, that they will make very excellent soldiers."

Image is from the Library of Congress, and is a statue of Alexander Hamilton in front of the US Treasury Building. The U.S. Department of the Treasury building was originally designed by Ammi B. Young. Sculptor James Earle Fraser created this statue of Alexander Hamilton, the first Secretary of the Treasury which stands in front of the southern façade facing The Ellipse.Further Reading

***
On this day in 2013, I ran to the steps on the Second Bank of the United States.

For most of the Second Bank's twenty year tenure (seeprevious post for more on the history of the Second Bank), Nicholas Biddle served as its President. Mr. Biddle was a prominent Philadelphia lawyer, and child prodigy. He entered the University of Pennsylvania at age 10.

Notwithstanding his prominence, Mr. Biddle still had to do things that a bank president needs to do, such as denying a loan request when the borrower cannot meet credit terms. Even when that request comes from the former President of of the United States.

"Dear Sir, Such has been of late years the unfavorableness of the seasons for the staple productions in this quarter, and of the markets also for the main one, and such the disappointment in collecting debts on which I counted, that I find it necessary to resort either to a moderate loan or to a sale of property, which at the present juncture would be made to great disadvantage. The first alternative is of course preferable, the rather as the last, if not finally avoided, is more likely to be alleviated than made worse by delay. On the ground thus explained, I would ask the favor of you to say whether it be consistent with the views of the Bank of the U. S. to give me a credit for a sum not exceeding six thousand dollars, at the lowest allowable rate of interest; and if so, with what indulgence as to the period or periods for repaying the principal. It is proper to add that for making the Bank secure, real estate of ample amount and without flaw or incumbrance of any sort will be pledged in whatever form may be prescribed.Should this application be successful may I ask as a further favor that your answer may be accompanied or followed by the documents to be executed on my part, prepared according to the requites of the Bank. I may find it convenient to draw for a part of the fund as soon as the arrangements will permit. [Note: Biddle replied on April 26th that the bank had adopted a rule forbidding the advance of money on real estate for indeterminate periods.]"

Thursday, June 6, 2013

The Federal Deposit Insurance Corporation has served as an integral part of the nation's financial system since its inception in 1933. Our trust in this institution is so strong that it is rare to find someone with a checking account in a bank that lacks an FDIC placard in the window. Nonetheless, the failure and resolution of Texas-based First RepublicBank, reminds us that the hand of government can harm as well as help when it wrestles the invisible hand of the market.

More than an insurer of accounts up to $250,000, the FDIC also regulates financial institutions and serves as a receiver in bankruptcy. The latter role was codified in the Federal Deposit Insurance Act of 1950, which provided the FDIC "additional powers to both expedite the liquidation process for banks and thrifts in order to maintain confidence in the nation’s banking system," the FDIC's Resolution Handbook explains.

RepublicBank merged with InterFirst Corporation in June 1986, and formed First RepublicBank Corporation, the largest bank holding company in the Southwest at the time. Then FDIC Chairman William Seidman expressed concern about the merger of two weak banks, "however, without the merger, both banks were more likely to fail, and they would cost even more [apart] than if they failed together," Seidman recalled in his memoir Full Faith and Credit (pg. 147).

Seidman’s concerns were warranted. With both banks highly concentrated in the weak Texas real estate market, the deal ended up helping neither bank. As the bank’s losses mounted, depositors fled. Just nine months after the merger was completed, the FDIC had to step in to resolve the failing institution, and at $3.9 billion, it was the was the most costly bank failure in FDIC history.

Though much can be blamed on the poor condition of the bank's assets, some of the government's dealmaking “proved to have some room for improvement,” according to the FDIC’s review ("Managing the Crises," pg. 612).

Included in the resolution was a servicing agreement between the FDIC and NCNB Corporation of Charlotte, NC, the acquiring bank of First Republic's assets, which required the FDIC to cover costs associated with managing the troubled asset pool. This agreement turned out to be a major source of income for NCNB, and gave them an incentive to hold on to the assets rather than liquidate when the market strengthened. All told, the FDIC paid $1.9 billion in management fees to NCNB.

Another issue was taxes. The IRS had negotiated with NCNB (and no other bidders) $700 million in tax savings with the acquisition. A letter from the IRS allowed the acquirer to treat the deal as a “tax-free reorganization and to carry forward losses from the failed banks to offset future income," according to the FDIC's analysis ("Managing the Crises", pg. 596). These tax savings allowed NCNB to compete aggressively in the Texas market, offering above-market deposit rates and below-market loans rates.

In stepping up when banks fail, the FDIC provides “an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people,” President Franklin D. Roosevelt said in 1933. But the example of First Republic reminds us that infusing government into any market-based transactions can change the outcome for better and for worse. In restoring public confidence, the more invisible our government can be, perhaps the better.